June 3, 2013

What News Corp's Hacking Scandal Has to Do with James Rosen's Phone Records

It seems to have gone nowhere. After the phone hacking scandal broke two years ago, British politics was in tumult. The world’s oldest English-language newspaper, the News of the World, was peremptorily shut down. News Corp., the world’s second biggest media conglomerate, was in meltdown. Senior executives either resigned (like Dow publisher Les Hinton) or were arrested (like CEO Rebekah Brooks). The resignations were quickly followed by the defenestrations of Britain’s most senior police officers, who had wined and dined with those same executives rather than investigating them.

The Murdoch dynastic succession was also shattered. James Murdoch was forced to forsake the biggest media acquisition in European history (a $16bn bid for the takeover of BSkyB) and left the country in shame. A judge-led public inquisition, the Leveson Inquiry, was set up to look into the nexus between the police, press and politicians—shining an excoriating beam into the cosy cartel of media moguls and prime ministers which, Prime Minister David Cameron admitted, had been “too close.”

After such revelations, where next? Well, Lord Justice Leveson’s recommendations for an independent press complaints body have spent six months mired in Parliamentary wrangling. There are now two competing “royal charters” in contention, mainly because – by perverse logic – these archaic medieval instruments don’t sound like “state control.”Meanwhile, the national press, having complained that politicians were trying to chill and silence them, are now insisting that members of the unelected House of Lords should be allowed to run the new replacement for the Press Complaints Commission. Why? Because some key press barons in Fleet Street are noble Lords.

When those who buy pixels by the terabyte cite Jefferson, Paine or Wilkes, take it with a boulder of salt.

To Americans, this must look like an episode of Downton Abbey—with antique arguments about regulation anathema to first amendment principles. But wait. Waves from this political earthquake are about to cross the Atlantic, where News Corp. is registered and where its chair and CEO Rupert Murdoch is citizen. They may well have had an impact on the James Rosen scandal.

U.S. Liabilities related to the scandal are mounting. As I revealed in November, there is prima facie evidence that News Corp. made illegal payments to U.S. officials for pictures of Saddam in captivity, simultaneously published by the New York Post and the Sun. The lawyer for many of the U.K. phone hacking victims, Mark Lewis, tells me his plans to open civil suits in the U.S. are proceeding apace. Last month, News Corp was forced by its insurer to settle a shareholder suit for $130 million, and instituted new corporate governance and claw back schemes for errant executives. And then there is the two-year-long Department of Justice investigation into News Corp for breaking the Foreign Corrupt Practices Act—with massive fines and possible imprisonment for any U.S. company and its directors caught bribing foreign officials.

Of over a hundred arrests by Scotland Yard since the hacking scandal broke, the majority have been for a pattern of alleged corrupt payments by Murdoch’s U.K. subsidiary to public officials. Several police officers have already been jailed. News Corp. has handed over thousands of emails to DOJ investigators—mainly because co-operation reduces potential fines. The FBI has interviewed many people in London; agents have reportedly travelled as far afield as Russia, Italy and China in search of corporate misdemeanour. The SEC has combed through the books and records. Typically, FCPA investigations take two years: judgement day is looming.

This is where the UK scandal connects to the saga of Fox News reporter James Rosen, whose emails and phone records were subpoenaed by the Department of Justice investigating leaks of classified information about North Korea in 2009. Most of the furore concerns the fact that Fox News was not informed. But the DOJ maintain subpoenas went to Murdoch’s parent company in late August, 2010. News Corp. has supported this timeline of events.

This revelation ruined a good narrative in which the heroic Rosen was being secretly persecuted for an act of journalistic truth-seeking. As Fox News chief Roger Ailes—the one News Corp. board member Murdoch reportedly fears—thundered: “We will not allow a climate of press intimidation, unseen since the McCarthy era, to frighten any of us away from the truth.”

Oops. Did Ailes’ bosses not get the memo?

Across the Atlantic, Ailes’ outrage sounds very familiar. For the last six months, the British press has also been crying freedom of speech and witchhunt. Lord Justice Leveson has so often been accused of “chilling” the press he could be a latter day Mr Freeze. The media are so vocal in defending their own interests and freedoms, one can only wish they would be so strident in defending ours.

That split will soon become permanent. On June 28th Fox News and the lucrative pay TV assets will be separated from the financially ailing and scandal-hit publishing assets. As the SEC filings make clear, the new 21st Century Fox group will not indemnify “violations of law… criminal fines or penalties” for the radically reduced News. Corp.

Most Murdoch-watchers believe the sundering of his media empire was accelerated to contain the burgeoning legal and financial liabilities. The residual rump News Corp. is left with a balance sheet of about $12.4 billion, of which 10 per cent - around $1.2-$1.4 billion – has been written down. If that’s the FCPA fine, it will be the biggest DOJ settlement since Murdoch’s friend Michael Milken and Drexel Burnham Lambert in 1988.

The last time Murdoch himself was in this position with U.S. authorities was in 1998 when—as Neil Chenoweth relates in his book Virtual Murdoch—the DOJ forced him to abandon a long cherished major satellite project, Sky America. By coincidence, Murdoch’s New York Post started running stories about Chelsea Clinton in college around the same time.

Brits (let alone Australians) might be more suspicious.

The Leveson Inquiry laid the bare the insider lobbying of legislators and public monstering of unpliable politicians. The only reason we look to regulation is because we lack the enforceable trust-busting competition laws and media ownership rules you have in the U.S. Most the egregious ethical breaches, law breaking and “cover-up” (the latter of those is Murdoch’s own term) can be directly ascribed to monopoly power where a foreign company can control 40 per cent of the British press, and the country’s largest broadcaster in terms of revenues. This couldn’t happen in the U.S., where Murdoch owns no more than 15 per cent of any given market, and had to become a U.S. citizen (fast tracked by Reagan in 1985) to set up the Fox Network.

When those who buy ink by the barrel-load (or pixels by the terabyte) cite Jefferson, Paine or Wilkes, their protestations should be taken with a boulder of salt. Freedom of the press and freedom of speech are not the same things these days. Since the 18th century the press and media has spawned vast private bureaucracies to match those of church and state. In the information age, with many corporations richer than nations, and many of them masters of “representation with no taxation,” the media no longer just holds power to account, but has become an often unaccountable power in its own right.